Tag Archives: student loan

Tax Tips: Student Loans and Your 2013 Tax Return

Tax Return 1040As you get ready to file your 2013 tax return, review these tax tips if you have student loan debt. Understanding how taxes and student loan payments intersect could help you save money. And if you will soon pay off a student loan with forgiven principal, you might need to prepare yourself for a tax hit.

Tax Tip 1: You Might Be Able to Deduct Interest on Student Loan Payments

If you paid interest on student loans during 2013 and your modified adjusted gross income (AGI) is less than $75,000 if you are single, and less than $155,000 if you are married filing jointly, you can deduct up to $2,500 on your 2013 federal taxes. (There is no deduction if you are married filing separately.)

The amount you can deduct depends on:

  • How much student loan interest you paid.  If you paid less than $2,500, then your deduction is limited to the amount you actually paid.
  • How much income you earned. If your AGI is between $60,000 and $75,000 for singles, or between $125,000 and $155,000 for married couples filing jointly, the IRS prorates your deduction.  This means your deduction will be lower than if your income was less than $60,000 (single filing) or $125,000 (married filing jointly).

For details on the formula for determining your tax deduction, what counts as a student loan interest, and examples of how this works, see Nolo’s article Tax Deductions for Student Loans.

Tax Tip 2: Filing Status Can Reduce Your Future Student Loan Payments

If you are married and are paying student loans under one of the federal income-driven student loan repayment programs, your filing status can affect your student loan payment amount for the next year.

Under the federal Income Contingent Plan (ICR), the Income Based Plan (IBR), and the Pay as You Earn Plan (PAYE), the amount of your student loan payment is based on your income, family size, and basic living expenses. Each year, the loan servicer uses the information in your tax return to reset the amount of your student loan payment. (Learn more about how these repayment plans work in Nolo’s article What’s the Difference Between Income Contingent Repayment Plans and Income Based Repayment Plans?)

If you are married and file a joint tax return, your loan servicer will consider the income of both you and your spouse in setting your student loan payment  amount. But, if you are married and file a separate tax return, your loan servicer will consider only your income when setting your student loan payment amount. If your spouse’s income is significant, filing separately could reduce your student loan payment for the next year.  (For more information and examples of how this works, see Nolo’s article Tax Filing Status and Student Loan Payments.)

Tax Tip 3: If You Have Forgiven Student Loan Debt, You Could Face a Tax Hit

If you enter into one of the federal flexible student loan repayment plans, such as ICR, IBR, or PAYE, your student loan payment is determined by your income. After you have made payments for the full loan term (which can be up to 30 years), if any debt remains, the federal government will forgive it.

The problem, come tax time, is that the IRS treats forgiven debt as income. If the forgiven student loan amount is more than $600, your loan servicer will send you a 1099-C and you’ll have to report the forgiven debt on your tax return as income. This can result in a hefty tax increase.

Fortunately, there are some exceptions to this tax rule. For starters, forgiven loan debt for some types of student loan forgiveness programs doesn’t count as income for IRS purposes.  If the government discharged (wiped out your loan) for certain reasons, that also does not count as income. And you might be able to avoid a tax bill if you were “insolvent” at the time of forgiveness. (Learn more about the exceptions to paying income tax on forgiven student loan debt.)

If the federal government has forgiven, or will soon be forgiving, some of your student loan debt, talk with a tax expert to determine your tax liability, any exceptions you may qualify for, and how to prepare for the tax hit, if it comes to that.

Can the IRS and Student Loan Creditors Collect From Me When I’m on SSI?

Erasing DebtASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

I am writing for a friend who doesn’t speak English.  He is worried about creditors levying his bank account to collect two old debts (a student loan and a tax debt). Should he file for bankruptcy? 

Juan is 61 years old and recently started receiving Supplemental Security Income (SSI). He will qualify for Social Security benefits soon. The student loan debt is very old (30 years) and is now $18,000 but was originally around $8,000. He hasn’t paid the loan for a long time and the creditor told him they “can take his Social Security or his SSI.” 

The second debt is old federal income taxes, around $10,000. He has failed to file tax returns for many years (perhaps as many as ten), but he has had little or no income during the same period. He wants to know if the IRS can take some or all of his SSI or later his Social Security for unpaid taxes. 

Thanks in advance for your expertise,  

Manny

Dear Manny,

Based on what you’ve told me, Juan can most likely get rid of his student loan debt because he is totally and permanently disabled. And it is almost certain that he doesn’t have enough income for the IRS to take anything from him for the old tax debt. Bankruptcy won’t be necessary.

Discharging Student Loans Based on Total and Permanent Disability

There are basically two types of student loans – subsidized (often called federal student loans) and unsubsidized (called private student loans). Subsidized loans are made or guaranteed by governmental entities. They subsidize the interest rate so that the loan interest will be less than what private lenders normally charge. Unsubsidized student loans are made by private banks. They usually charge an interest rate that is higher than subsidized loans, but still less than ordinary consumer loans.

I am sure that Juan has a subsidized loan. When he got his student loan 30 years ago, private unsubsidized loans were basically unheard of.

The distinction is important for Juan. Lenders of subsidized loans are subject to federal regulations that allow for the loan balance to be forgiven if the borrower is totally and permanently disabled, and without financial means to pay the loan. Because Juan is 61 years old and receiving SSI, he must have already convinced the Social Security Administration that he has a total, permanent disability, and lack of any other income.

How to Cancel a Student Loan Due to Disability

If Juan’s loan is indeed subsidized, he can apply online here:  www.disabilitydischarge.com.  You can submit your SSI award letter to prove you are disabled if the award says your review is not sooner than five years. Otherwise, you will need to get a letter from your doctor. (To learn more about canceling student loans because of disability, see Nolo’s article Canceling Student Loans: Permanent Disability or Death.)

Getting Rid of Unsubsidized Student Loans

If Juan has an unsubsidized loan, he is out of luck. Private lenders normally will not forgive a loan. However, in this situation he might be able to discharge the loan in bankruptcy. While wiping out a student loan in bankruptcy is difficult, lately more and more courts are discharging loans like Juan’s – very old loans where the debtor is elderly and disabled and has no hope of earning income in the future. Unfortunately, Juan would likely need an attorney to help him do this, and it sounds like he doesn’t have the money to pay what could become very high legal fees to fight with the student loan collectors.

IRS Collection Standards: When the IRS Cannot Take Your Income 

Now let’s deal with Uncle Sam, the good old IRS. According to the website of the IRS Taxpayer Advocate, the IRS can take a person’s Social Security benefits in order to repay tax debts. However, as the advocate’s website also states, the IRS must allow the tax payer to retain enough money to cover modest basic necessities. These living expense allowances are called Collection Financial Standards.

I am certain that Juan’s SSI benefit does not leave him enough to pay for basic necessities pursuant to the Collection Financial Standards. His income won’t even come close to exceeding the amount of money he is legally allowed to keep.

Juan should immediately contact the IRS and ask them to mark his account as “current uncollectable status.” They will verify his income, match it up to the living expense allowances in their collection standards, and see that his income is below the level they are allowed to collect from. It is a process that can be done on the telephone, and they will do the form for him.

Let’s recap. Juan should request forgiveness of his student loan on the grounds of total, permanent disability. He should also contact the IRS and request “current uncollectable status.”

Juan won’t need to file for bankruptcy.

– Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Fake Sallie Mae Instagram Accounts Try to Scam Those With Student Loan Debt

mousetrap with free moneySeveral days ago scammers posted to Instagram promising student loan debt relief to the first 20,000 responders. The fake accounts purported to be from Sallie Mae and the posts said that due to the government shutdown, people could get rid of their student loan debt. Sallie Mae denies owning the accounts, and sets the record straight on its own Twitter feed and Facebook page.

Scammers Love to Target Those in Tough Financial Straits

This is just another example of the thousands of scams targeting people who are struggling with debt, whether it be student loans, credit card bills, mortgages, or car loans. If a new financial crisis pops up that affects lots of people, scammers pounce. We saw this with the foreclosure crisis.  When the numbers of people facing foreclosure dramatically increased, all sorts of new “help” did too – like foreclosure rescue consultants who took people’s money with the promise of saving homes, but then disappeared.

Why Student Loan Borrowers?

The number of people struggling to pay student loans has skyrocketed in recent years. In fact, the total amount of national student loan has now overtaken that of credit card debt.

Bankruptcy isn’t much help to most people (it’s tough, although not impossible, to discharge student loans in bankruptcy). And the Department of Education and its collectors are able to use collection methods unavailable to most other types of creditors. For example, the Department of Ed can garnish your wages or take your tax return without first suing you and getting a judgment (most other creditors must sue you in court and get a money judgment before using such collection methods).

This means that most student loan borrowers feel particularly desperate when they can’t make payments or are in default. And that’s where the scammers come in. According to Los Angeles bankruptcy attorney Leon Bayer, there is a proliferation of radio and Internet advertisements for “student loan negotiation.” These, say Bayer, are the newest incarnation of schemes to take advantage of people when they are feeling desperate. (You can hear more from Leon on this and other subjects in his recent radio interview on KALW.org.)

The National Consumer Law Center recently issued a report on the increase in student loan “debt relief services.” The report found that these “businesses” engaged in a wide range of deceptive practices and outright fraud. (See New Report Documents Abuses by Businesses “Helping”  Those With Student Loan Debt.

Don’t Be Taken In

Whatever you do, says Bayer, don’t provide personal information in response to these ads that claim to provide help.  That’s what they’re looking for – enough information so that they can steal your identity. No doubt, that was the aim of the Instagram scam.

You can avoid many types of scams by keeping in mind the old saying “if it looks too good to be true, it is.” Canceling all of your student loan debt just by responding to an Instagram post?  Yep – waaaay too good to be true.

Legitimate Ways to Reduce Your Student Loan Payments

If you have federal student loans (meaning they were made by the federal government or guaranteed by the federal government) you may be able to take advantage of one of the Department of Education’s flexible repayment plans. Under these plans, your payment could be as little as $0 if your income is very low. (Learn how to find out what type of student loan you have and the student loan repayment plans available to you.)

If your loans are private, then your options are much more limited. Your loans are not eligible for the federal repayment plans. You might be able to negotiate something with the lender, although don’t expect miracles. If you want to try this, however, do it yourself or talk to a lawyer. And if you are having a problem with a private student loan lender (for example, it won’t return your telephone calls), file a complaint with the Consumer Finance Protection Bureau. (See my previous blog post, Problem With a Private Student Loan? Tell the CFPB for more information about the CFPB ombudsman.)

Student Loans and Marriage: Go Together Like a Horse and Carriage

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

horse & carriageDear Leon,

Can creditors garnish my spouse’s wages for my defaulted private student loans? I live in California.

Liz

Dear Liz,

The answer is yes. Your student loan creditors can garnish your spouse’s wages to recover the amount of your defaulted student loan. You don’t mention whether the loan was incurred before or after marriage. Unfortunately, it doesn’t matter. Either way, the creditors can collect, but for different reasons.

Although the explanation won’t make you any happier, at least you will understand why it works this way.

(To learn about ways to manage student loan debt, get information about federal flexible repayment plans, and find out what happens if you default, visit Nolo’s Student Loan Debt area.)

If You Incurred Student Loan Debt Before Your Marriage

I will begin by assuming the debt was incurred prior to marriage.

A Primer on Community Property Law 

California is what we call a community property state. Community property is a special term used to define how property rights and financial liabilities are assigned between spouses. In a community property state, property that each of you had prior to marriage remains your separate property. Debts that each of you had prior to marriage remain your separate debts. Any assets and debts acquired by either spouse during marriage are normally assigned to the community, that is, to both spouses regardless of who brought it in (there are some exceptions, but those would not apply here).

That brings us to the justification for the garnishment of your spouse’s wages for your separate pre-marital debt. Your spouse does not “inherit” your debt. But under the definition of community property, half of your spouse’s wages belong to you. So the student loan creditor can garnish the part of your spouse’s wages that belong to you under the community property laws.

(To  learn more, see Nolo’s article Debt and Marriage: When Do I Owe My Spouse’s Debts?)

Enter the Prenuptial Agreement

All of this explains why some couples opt for a prenuptial agreement. They wish to be a married couple, but for their own reasons they don’t want to share their post nuptial income equally with each other.

I assume you did not have a prenuptial agreement. You might go to a divorce lawyer and look into the feasibility and enforceability of entering into a post nuptial agreement. A post nuptial agreement might do the same thing to protect your spouse’s income as a prenup might have done. The completion of either a divorce or a legal separation agreement might also protect your spouse’s wages from your student loan garnishment.

A word of caution: Marital agreements don’t always hold up in court. I can imagine a creditor complaining that a post-nup be invalidated as a fraudulent transfer.

(Learn more about prenuptial agreements.)

If You Incurred the Student Loan Debt During Marriage

Finally, what if the student loan had been made during the marriage?  The creditor could still garnish your spouse’s wages, because the wages are community property. Moreover, spouses are normally liable for each other’s debts that are incurred during the marriage. It usually makes no difference that the promissory note for the student loan was never signed by your spouse.

Comedian Red Skelton, who often joked about marriage, once said, “I love my wife. We always hold hands. If I let go, she shops.”

Red must have lived in a community property state.

Sincerely,

- Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

California Bill Would Stop Wage Garnishments for Private Student Loans

StudentLoans_iStockA bill introduced in the California legislature (AB233) would prohibit wage garnishments if the underlying judgment was for private student loan debt. The bill, introduced by Assembly Member Bob Wieckowski (D – Fremont), would mean that private student loan lenders couldn’t come after the wages of students who could no longer pay their loans.

The Current Law

Right now, a private student loan lender can sue a student who is delinquent on loans. After getting a judgment, the lender can garnish up to 25% of the former student’s wages (or less in some instances). For details, see California Wage Garnishment Limits.

(To learn how wage garnishment works, see Nolo’s Wage Garnishment topic area.)

Which Loans Would Be Subject to the Wage Garnishment Ban? 

If the bill becomes law, it would not affect the ability of the federal government to garnish wages for the collection of federal student loans. Federal loans are those that are made or guaranteed by the federal government. Examples include Stafford Loans, Direct Loans, and PLUS Loans. Private student loans are those made by private lenders, not the government. (To find out if your loans are federal or private, see Nolo’s article What’s the Difference Between Private and Federal Student Loans?)

If you are struggling under a mound of student loan debt, visit our Student Loan Debt area for articles on government repayment plans and other ways to handle the debt.

 

Can I Reopen My Bankruptcy Case to Discharge a Student Loan?

Leon Bayer PhotoASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I filed a bankruptcy seven or eight years ago. I asked my lawyer to include my student loan in the bankruptcy. However, my lawyer wouldn’t even try to see if we could get it discharged in the bankruptcy. Is it too late to try now? 

You can imagine my frustration that I’ve been paying on this loan and will be continuing to pay on this loan until 2023. 

Thanks, 

Sarah

Dear Sarah,

Student loans are usually not dischargeable in bankruptcy. However, there are limited circumstances where student loans may be discharged. If you think you qualify for a discharge, you can reopen your bankruptcy case to litigate the issue.

The Undue Hardship Standard

To seek a bankruptcy discharge of a student loan, the borrower must file a lawsuit in bankruptcy court against the lender. The borrower must prove in trial that repayment will impose an undue hardship on the debtor or any dependent of the debtor. These can be hard cases for a borrower to win.

In California, bankruptcy courts require a finding that the debtor has proven each of the following three elements of undue hardship:

  • the debtor cannot maintain, based upon current income and expenses, a “minimal” standard of living for himself or herself and his dependents if compelled to repay the student loans
  • additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans, and
  • the debtor has made good faith efforts to repay the student loans.

Most borrowers who succeed in discharging student loans are able to do so because they have a severe total permanent disability, either physical or mental. Most of the cases I have handled involved a mental disability, such as permanent disabling depression and anxiety disorders.

(To learn more, see Nolo’s article Student Loan Debt in Bankruptcy.)

Getting Help From an Attorney

The process of such court litigation is extremely difficult. Most debtors will not have the skills to do this on their own. It can also be very expensive if done through an attorney.

Unfortunately, those people who might qualify for the undue hardship discharge are unlikely to have the money to pay a lawyer. If such a borrower can afford a lawyer, that very fact may negate the claim that it will impose an undue hardship. In most cases that I’ve handled, the attorney fees were paid by a family member who wanted to help.

Reopening Your Bankruptcy Case

It is possible to reopen your bankruptcy case for the purpose of seeking a hardship discharge of your student loan. If you feel that you may qualify for a hardship discharge, consult a lawyer with experience.

Other Ways to Get Relief From Student Loans

Lastly, I want to point out that borrowers who have a total permanent disability may qualify to receive forgiveness of student loans that are guaranteed by or partly funded by a government entity or a nonprofit institution. If so, this can be done without a bankruptcy. Such lenders have established a comparatively easy procedure to apply for such forgiveness. Details can be obtained directly from your lender.

Even if you don’t have a permanent disability, there are many government repayment programs that can help you lower payments or get a forbearance. To learn more, check out Nolo’s Student Loan area.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer. 

Find Leon on Google+

 

Got a Consumer Complaint?

If you have a complaint about your credit card company, student loan holder, mortgage lender, car loan lender, or bank, you can log your grievances on the new Consumer Financial Protection Bureau  (CFPB) website.

The CFPB is now fielding complaints in the areas of:

  • credit cards
  • student loans
  • mortgages
  • car loans
  • bank accounts or services

To file a complaint, visit the complaint center on the CFPB website at (www.cfpb.gov/complaint.)

Once a complaint is lodged, the CFPB confirms that the lender has in fact done business with the consumer. The lender then has 15 days to respond to the complaint and 60 days to address the problem. To learn more about the complaint process, see the CFPB’s Consumer Reports: A Snapshot of Complaints Received.

The CFPB has already created a database that compiles credit card complaints, and has made this information public. The database doesn’t disclose the consumer’s name, but does disclose how the credit card company dealt with the issue. The CFPB plans to have similar databases for the other types of complaints in the future.

Student Loan Debt & Chapter 13 Bankruptcy

ASK LEON

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon: I received a discharge in a Chapter 7 bankruptcy in 2009 (three years ago). I have a large delinquent private student loan – the outstanding balance is $44,000.  The student loan holder will settle only if (1) I agree to allow it to enter a judgment against me, or (2) I agree to high payments, which, quite frankly, I can’t afford. 

Can I file a Chapter 13 bankruptcy and get into a better payment plan? Would this reduce or stop the interest from accruing? If this will work, how long will the Chapter 13 plan allow me to repay the debt?

Thank you in advance for your assistance.

Erin

Dear Erin,

Dealing with student loan debt is tough because there is rarely a perfect remedy. To begin with, I am going to assume that an “undue hardship discharge” of your student loan is not an option. (To learn more about discharging student loans in bankruptcy because of undue hardship, see Nolo’s article Student Loan Debt in Bankruptcy.)

Paying Student Loan Debt Through Your Chapter 13 Plan

If you are eligible for Chapter 13 bankruptcy and can confirm a Chapter 13 plan, you can manage any type of student loan, whether private or public, through the plan for up to five years. (To learn how a Chapter 13 plan works, see Nolo’s Chapter 13 Repayment Plan area.)

Your Student Loan Will Not Be Discharged and Interest Will Accrue

However, you cannot discharge (wipe out) the student loan debt, so if you cannot pay it in full during your Chapter 13 case, the remaining balance will remain when your case is over.

In addition, in your case, because you received a Chapter 7 discharge less than four years ago, none of your debts would be discharged at the end of your Chapter 13 case. (To learn more, see Multiple Bankruptcy Filings.)

If a debt is not dischargeable in bankruptcy, the interest owed on the debt will continue to accrue during the bankruptcy.

Advantages of Using Chapter 13 to Repay Your Student Loan

I do think filing for Chapter 13 bankruptcy may offer some advantages in your situation. Some or all of these might not apply to every situation, so you should seek advice from an experienced bankruptcy attorney before you decide what to do.

  • With Chapter 13, your monthly payments (which you make for up to five years) may be much less than those the creditor is demanding. At the same time, you’ll get temporary relief from aggressive debt collection for the duration of the Chapter 13 case.
  • After you file for bankruptcy, you might be able to reach a better agreement with the creditor than what it previously offered. This is because, when faced with the prospect of small payments for the next five years, your student loan creditor might prefer to rehabilitate the debt and restore it to normal monthly payments.
  • Filing a Chapter 13 bankruptcy can give you the time and peace of mind to improve your finances.
  • After you complete your case, some lenders may be willing to rehabilitate the loan and restore the normal contractual payment.
  • Even if nothing better is accomplished, you have bought up to five years of peace of mind before everything “hits the fan” again.

I hope this insight is helpful.

- Leon

Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California.  He is a partner at Bayer, Wishman & Leotta.  

The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Problem With a Private Student Loan? Tell the CFPB

In February, the newly formed federal Consumer Financial Protection Bureau (CFPB) put out a call to student loan borrowers:  If you have a beef regarding a private student loan, file a complaint on the CFPB website.

What Is a Private Student Loan?

If a bank or other financial institution loaned you money to attend school, and that loan is not backed by the federal government (that is, it’s not federally guaranteed), you have a private student loan.

The CFPB Now Oversees Private Student Loans

Prior to the formation of the CFPB, there was no one agency that oversaw and regulated the private student loan industry. (Public student loans, on the other hand, are regulated by the Department of Education.) Since July 2011, the CFPB has taken over that role. As part of its oversight, the CFPB has created an ombudsman program. The ombudsman will review complaints about private student loans and assist those borrowers.

Types of Complaints

The CFPB ombudsman is urging students and former students to file complaints of any nature. Some examples of complaints it anticipates receiving include:

  • trouble making payments
  • confusing advertising or marketing terms
  • billing disputes
  • deferment and forbearance issues, and
  • debt collection and credit reporting problems.

You can find the online complaint form, here.

Or, if you don’t want to file a formal complaint, but just want to tell your story, you can do that here.

What Will the CFPB Do?

The CFPB states that it will help all student loan borrowers who are having trouble:

  • getting a private student loan
  • repaying a private student loan
  • managing a student loan that has gone into default, or
  • dealing with a student loan that has been referred to a debt collector.

Once the CFPB receives your compliant, it will give you a case number so you can track progress of the complaint.  It will forward your complaint to the financial institution involved and then keep track of progress. The CFPB says it expects to have cases come to resolution within 60 days. It’s unclear from the information on the CFPB’s website what role the ombudsman will take in resolving those issues.

The CFBP will use the information it gathers from borrowers’ complaints and stories to report to Congress on the private student loan industry.

Another Handy Tool

The CFPB also has a handy online tool, the Student Debt Repayment Assistant, to help you figure out your student loan repayment options. You can also find information about repayment in Nolo’s article Student Loan Repayment Options.

How to Contact the CFPB